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Edited Transcript of VERK.HE earnings conference call or presentation 24-Apr-20 8:00am GMT

Q1 2020 Verkkokauppa.com Oyj Earnings Call

HELSINKI Apr 29, 2020 (Thomson StreetEvents) -- Edited Transcript of Verkkokauppa.com Oyj earnings conference call or presentation Friday, April 24, 2020 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Panu Porkka

Verkkokauppa.com Oyj - CEO & MD

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Presentation

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Panu Porkka, Verkkokauppa.com Oyj - CEO & MD [1]

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All right. Good morning, everybody, and welcome to Verkkokauppa.com's Q1 Presentation. If you have any questions during the presentation, please feel free to send us questions to investors@verkkokauppa.com, and questions will be then read out loud at the end of the presentation and answered either by me or CFO, Mikko Forsell, who is also joining me today.

In my presentation, I will first go through some highlights out of the report of this morning and the sales and the profitability development. Then I will give you some insight how we develop the company further to strengthen our position and competitive advantages. Then interesting how we see the market to be developed globally and also on Finnish scale. And then we have the short summary with questions if there are any.

So let's start with the revenue development. Revenue stood at EUR 125.3 million, with an increase of 8% to previous year, probably slightly above the expectations, and I will go in next slide into the reasoning of that.

The next part, we can look combined gross margin and profit. If we start with the margin side, so we were able to improve the product margin slightly to 15.5%. And due to the good development in revenue and slight improvement on gross margin side, the gross profit was up by 12%.

And due to the reason that we were able to run the business with almost same cost level, other operating expenses actually slightly decreasing. Personnel expenses, only slightly up due to some recruitments. And then we end up in an operating profit of EUR 3.4 million. And if we deduct from that one-off expenses due to preparations for main listing capabilities, to be main listed company, the comparable EBIT was EUR 3.8 million, with a strong increase of the 63% the previous year.

So all in all, if you look at the quarter, we can see that the revenue development good, slightly above expectations. The company was able to improve margins. And with maintaining the same cost position, the profitability went up from 2% to 3% and we can be pleased with that. So it was the 25th consecutive quarter that the company has been able to grow, and it is actually the record profit all-time history in Q1 for the company.

And due to the good solid performance and financial state of the company, the Board decided this morning to pay out a quarterly growing dividend. And for first quarter, the growing dividend will be EUR 0.053 per share. So thank you all investors. Thank you for owners. And probably, the good situation of the company and performance will also attract new customers and also new investors to the company.

Let's go slightly deeper through the sales development. A good foundation for the performance was major categories where we were able to defend the position or even have a slight increase in sales, so meaning TV, phones and computer category.

The second thing is that our web channel was doing very good, and the web visitors increased throughout the quarter. And in the latest part of the quarter, the last few weeks, due to the retail shifting strongly towards online, visitors increased 30% or even more on a weekly basis.

Then if you look at the categories further, the midsize and especially the evolving categories had a strong performance. For example, sports almost doubled the revenue. Good performance in house category by plus 20%. And strong performance by grill category, up by 28%, so also a good indicator for the upcoming season.

Next thing good to mention is that we were able to have effective and interesting campaign mix with diversity in segmentation and diversity in campaigns. So utilizing basically the wide arrangement. And also, we did some shift towards online marketing as we saw that, that channel is really doing well. So with those kind of shifts, we were able to maximize the revenue growth.

The profitability comes from many different actions that the company did to improve it. First thing is that with the sales mix of main categories, just slightly increasing. And midsized and evolving categories contributing strong to the performance of the sales growth. The sales mix and the margin mix is in favor. So in major categories, normally, the competition is a bit tighter and the margins are historically lower. And in sales development, midsize and evolving categories have a bigger role, then the margin normally has a positive effect due to the sales mix.

We were able also to improve our turnover in stock, so meaning bulky and big category inventories had a better turnover. And if there's no need to push the turnover or deduct stock levels with price, that also eases up the pressure on gross margin normally.

All in all, the category management and supply chain management has doing a good job in deducting slow movers, introducing new products that have a good turnover. And also, categories which come with a high amount of logistic costs and storage costs, we were able to optimize that stock, and that has a positive effect on other operating expenses.

So combining the effective -- more effective marketing, more targeting, more segmentation and wisely done campaigning with margin, these 2 components then had a positive impact combined.

And normally, in our line business with a strong e-commerce platform, we can scale the business better if the web channel is doing very good, and the sales growth comes from that. So we don't have to have extra workers or extra costs related to that channel. So normally, when online is performing well, also our scalability is slightly higher.

If we look at the balance sheet and the financials of the company, here, you can see clearly that the inventory was -- inventory went down by approx EUR 5 million. It wasn't so that we forced it to go down or we wanted to reduct it, it came with, like I said, good actions in category management.

Cash flow at this time of season was improved. To previous year, it was positive. And therefore, also a very strong cash position of EUR 45 million on the bank account, slightly up from year-end balance sheet. And also, if you add up the EUR 20 million credit facility that we have on top of that, it's fair to say that the cash position and financial situation of the company, also in reflects to the pandemic, is solid and strong.

We wanted to have the guidance here and as a reminder, mainly due to the reason that a lot of players on the market, a lot of retailers were revising their guidance or taking it back completely. At this time, the company sticks to the guidance. We expect revenue to grow this year and revenue to be somewhere between EUR 510 million and EUR 530 million. And also, the company is determined to improve the profitability, and profit will be somewhere between EUR 12 million and EUR 15 million for this year.

So let's go to the development side. The vision of the company is to be the benchmark in Nordics retail, really something that you can look up to. I think that our local strong brand position, with extremely cost efficiency towards main competitors and our own agile ecosystem that we can develop further, are things that we can build on to be even stronger positioned in the market for the future.

Let's start with the brand. For those who are not that familiar with the Finnish market, Verkkokauppa.com actually means webshop.com. So it is probably the best domain that you can ever have while doing retail in Finland. Nowadays, already, our brand is among the top 10 brands in Finland, if I ask from all consumers. So our brand is extremely strong and well-known already.

If we compare the brand to main competitors and some retailers, we are actually already at #1. So the brand position is super strong. And we strongly believe that the brand position, with the uncertainties and with the new disruption in retail market, really helps us even to go further and grow further.

We see ourselves a bit of a backbone in the Finnish retail market, the local hero, the Nordic Amazon, who really can adapt to the new changing environments in retail. Strongly followed by our values, which are always displayed and always back of mind if we do development work in the company.

Retailers normally talk most about customer experience. The value behind that is strongly the transparency and the fairness. We truly believe that being honest, being fair, being transparent in all doing to the consumer, we can build up loyalty and really, really seek also for new customers.

We have over -- or almost 300,000 different reviews on our site. So we try to do our best that the consumer can make wise decisions and really buy the -- or purchase the products that they really need and the fit is really the best possible for the need for the consumer at that time. We also publish service percentages and return percentages. We know suppliers sometimes don't like it, but we believe that it's the right way of doing the business. And really telling everything that we know about our products to the consumer.

To take next steps, we started already last year, our website is nowadays totally run through cloud. And this makes us thus able to run in all peak seasons, our website, without major, major problems. Last year, Black Friday was the first showing of that, that we were able to do that. And we are expecting also this year to have some peak seasons, and I think we are well prepared for those to come.

The search is nowadays already run IE-driven (sic) [AI-driven]. It is personalized. We will develop it further. And the next really big initiative, starting probably this week or next week, will be product information management. With even better product information, we can personalize, we can execute the search engine with parameters even better. And it will have a positive impact on conversion also to come, and therefore, in revenue for upcoming future.

The next big thing besides product information is the customer data, how we can utilize it even more, even more effective and personalized to be even more accurate to every consumer out there. We will be implementing a new customer data platform, probably during -- or starting this quarter. And that development work will also enhance the customer experience with better targeting.

As most of the improvement are done for the digital channels and utilizing digital technologies, we are not forgetting our 4 important stores. The pickup process is better than it ever has been before. And the next improvement will be done in Jätkäsaari, the flagship store that we have location-based price tags, so search and purchases are even easier to make also offsite.

Next and probably most important key advantage to the main competitors in Finland is our wide assortment. We have been developing the assortment for many, many years now also outside consumer electronics. It is good to understand that we are the only player with the major inventory locally. So if we compare ourselves to foreign [debt] players or some Nordic consumer electronic players who warehouses are maybe in Sweden or Norway, the local warehouse really gives us the advantage of being fast in delivery and having the best possible availability.

Next things -- or next category launch that we did a few weeks back was in home and garden. And we are also in the middle of negotiations with few A-brands suppliers, and I'm quite certain that we will introduce a few interesting A brands before summer already.

Fast deliveries, 3-hour deliveries in greater Helsinki area have been picking up extremely -- now we lost -- but I will continue because I have the presentation. You will have it later on, on the website. The next things that we will be developing in delivery side is fast -- sorry -- will be same-day deliveries in Tampere region, a big major city here in Finland. And an example of the fast-evolving consumer behavior, just a few weeks back, we introduced Saturday deliveries. And for the first Saturday, we had already over 100 purchase orders to be delivered on Saturday. So we really want to be the first one to introduce new ways of delivery, multiple options and, therefore, be the front-runner in that line of business.

Yes, you have -- you are still not showing or seeing it, but I will continue, and now you are probably listening even more to my presentation. Price leadership is something that we've been connected to for many years already. What you see behind is that the methology (sic) [methodology] of our working, of really maintaining cost-efficient ways of doing, making sure that our internal costs are as low as possible, makes us able to operate the business with lower product margin than that of the competition.

To be able to hit all the low price points, we utilize, obviously, private label partly. And with our strong cash position, we are actually in the position that we can make fast purchases. If we see some stock lots or a distributor has too many products of a certain category, we can negotiate on the price and then also give the price advantage forward to our consumer on the website. Also, on top of that, we have extremely wide sourcing network in Europe and also in Asia. So we are always able to compete and give -- or get a different kind of prices and therefore, negotiate even better terms for us in the future.

Besides of being a retail company, it is good to understand that we are also a tech company. We have 60 developers working internally in our organization, making sure that the technical development and capabilities are really up the game. And the business way of developing always consists the technology and what we can do with implementing new ways of working.

Next ones in development side will be around marketing automation, better tools, better analysis, to even make the marketing performance out top performance it has been doing so far. Category management capabilities and also tools will be the next one that we will be developing on. And fairly say, today, it is made basically manual at the moment, so we see there a great need but also a great potential of doing that in the coming future even more effectively. And therefore, also making our assortment even wider with the same amount of people working around it.

And the third big thing and issue will be supply chain management to digitalize the product flows internally, inside the company, will be important nowadays. Also mostly made manual, but we are seeking there to have some tools and also utilization of technologies.

So key priorities for this year, if we take them all together, first and foremost, make sure that consumer and staff is safe and we have all actions needed and taken towards the pandemic that we will probably go on for weeks, weeks and probably even months. Second, we will continue our brand marketing as planned. We strongly believe that the most or best possible brand position will also take us to the future as retail has seen a next disruption as it is going online at a fast pace at the moment.

New category, home and garden will also bring us new revenue development and also customer groups as the season is now starting. And like said, investments in technologies is something that's really driving our development work internally, supply chain management, category management and product info management -- product information management, 3 big, big initiatives that we will take further. And also not forgetting the cash position, which is strong, solid and gives up -- us also security going forward to some uncertain times.

For market look on a global perspective, a few highlights. The trade, obviously, will go down this year. It is estimated that it will decrease by 5%. The pre-corona estimates of retail going online stated that 2023 online will be approximate 22% of retail. I personally believe that this will change. I think it will be rapidly increasing, and we will have other numbers already this year and later next year as retail is going rapidly online.

But what it will bring, obviously, and it will hit all retailers, the uncertainties in production not only in Asia, but also in Europe, will bring some uncertainties and it will also affect availability also in our categories, but we will do our best to help them supplement and utilize our wide sourcing network.

If you look at the actions and measures taken to handle the pandemic, first and the most, most important part, making sure that our staff is safe, the personnel is safe all around the company, and also every customer that wants to come to the store can do it at the most secure and best possible way. Number of measures taking to make that sure.

The next thing is the contingency, how we make sure that the company keeps on operating, keeps on performing in all lines of businesses, we took some measures to make sure that it -- operation operates normally in these certain and special times. And supply chain was mostly effective as the consumer demand rapidly increased in certain categories. There is actually, nowadays, still availability issues in certain kinds of categories and we are doing our best to make sure that we get those as customer needs is there still.

Customer experience, obviously also immense important as new customers are introduced to the website and they are ordering home for the first time, that the delivery promises are made and kept. We have few days' delays, but I think we have been handling the situation extremely well. And here also a big, big thanks to the great staff, great personnel. We have been helping out each other in the stores in logistics. Office workers have been working in the store and also in logistics, making sure that customer experience and delivery promises are kept. Thank you to my staff.

So also, the community is not something that we don't want to forget. So first, we make sure that we have all the sanitizers and disinfection that we need for our personnel and internal staff, and everything rest is then sold to self-cost at our website, I think it's the right thing to do at this point. And there's also some charity actions that we have taken as we are in a good position that we can help those ones who are not.

But all in all, it has been obviously a tough time, but I think we have been managing it quite well. The security has been the first priority. But as we understand the situation today or coming weeks and months, at least now, there has been no negative effect on the business and on the revenue side, and we've been performing to expectations.

The Finnish market outlook, pretty much the same as the global one, the restriction of consumers and people staying home affecting the next disruption on the retail market in Finland. A lot of new consumers are introduced to the website, and they are making their first purchases and first home deliveries, and we actually expect that this will be a permanent shift, at most see that it is a really convenient way of getting what you want. If the product information is right, the information about availability is right, the delivery options are enough to meet the demand and the delivery comes in time. So there's no need for certain product categories to be purchased off-line anymore.

But still, the uncertainties going to the next and last half are higher. Uncertainties in purchasing power, uncertainties in unemployment, those things will be hitting all of us. We don't need what will be the mention of it. The last official state or estimates from the Finnish government said that GDP will be down, but the bracket was minus 5.5% to 12% (sic) [minus 12%]. So I mean, that also somewhat reflects that uncertainties are high and nobody knows what the latter half of the year will be.

So a few highlights, summary out of the presentation. If we take the Q1 and the figures, we were able to increase profitability while gaining market share, what we have said, what we have stated to be the first priority. In that way, a solid quarter from numbers.

We have been able to make sure that the operations are intact, that people are safe. We can operate our business in these uncertainties and abnormal times. And we even believe that going forward, our brand will be good positioned to even maintain our good path that we have taken this year.

Good to understand is that things still go on. The company has to be able to develop things and capabilities also for the future, not only this year but years to come. Development work around technologies has been going on without any delays. That's also a good thing. And because of the final -- financial situation and state of the company, also, the cash position is strong. We are able to pay out dividend, and therefore, no need to revise the outlook for this year at this point.

And last reminder that preparations to be able to main list the company at certain time are going as proceeded and as planned, and we will be then telling about those kind of news in weeks and months to come.

All right. I thank you all. And like said, the summer will come at some point and new introductions to our categories in home and garden have interesting products. So please join us on our site and make some purchases. All the best. Stay safe and have a nice weekend. Thank you.